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CITY OF ANAHEIM WATER UTILITY FUND Financial Statements June 30, 2008 and 2007 (With Independent Auditors’ Report Thereon) ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Table of Contents Page Independent Auditors’ Report 1 Management’s Discussion and Analysis (Unaudited) 3 Financial Statements: Balance Sheets 13 Statements of Revenues, Expenses, and Changes in Fund Net Assets 15 Statements of Cash Flows 16 Notes to Financial Statements 18 ---PAGE BREAK--- Independent Auditors’ Report The Honorable City Council City of Anaheim, California: We have audited the accompanying financial statements of the Water Utility Fund (Water Utility) of the City of Anaheim, California (the City), as of and for the years ended June 30, 2008 and 2007, as listed in the accompanying table of contents. These financial statements are the responsibility of the City’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Water Utility’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in note 1 to the financial statements, the financial statements present only the Water Utility Fund and do not purport to, and do not, present fairly the financial position of the City, as of June 30, 2008 and 2007, and changes in its financial position and its cash flows, where applicable, for the years then ended in conformity with U.S. generally accepted accounting principles. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Water Utility Fund of the City of Anaheim, California, as of June 30, 2008 and 2007, and the changes in its financial position and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative. KPMG LLP Suite 700 600 Anton Boulevard Costa Mesa, CA 92626-7651 ---PAGE BREAK--- 2 Management’s discussion and analysis on pages 2 through 12 is not a required part of the basic financial statements but is supplementary information required by U.S. generally accepted accounting principles. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. Orange County, California December 3, 2008 ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Management’s Discussion and Analysis June 30, 2008 and 2007 (In thousands) (Unaudited) 3 (Continued) As management of Anaheim Public Utilities, a department of the City of Anaheim, California (City), we offer the readers of the City of Anaheim Water Utility Fund (Water Utility) financial statements a narrative overview and analysis of the financial statements for the fiscal years ended June 30, 2008 and 2007. We encourage readers to consider the information presented here in conjunction with the accompanying financial statements. All amounts, unless otherwise indicated, are expressed in thousands of dollars. Financial Highlights The assets of the Water Utility exceeded its liabilities at the close of fiscal years 2008 and 2007 by $232,304 and $230,111, respectively. Of these amounts, $12,733 and $24,152, respectively, were available to meet the Water Utility’s ongoing obligations to creditors and customers (unrestricted fund net assets). The Water Utility’s total fund net assets increased by $2,193 and $193 for the fiscal years ended June 30, 2008 and 2007, respectively. Unrestricted fund net assets represented 26.1% and 48.2% of annual operating expenses for fiscal years 2008 and 2007, respectively. Overview of the Financial Statements This discussion and analysis is intended to serve as an introduction to the Water Utility’s financial statements. Because the Water Utility is a business-type activity of the City, an enterprise fund is used to account for its operations. These financial statements include only the activities of the Water Utility and provide comparative information for the last two fiscal years. Information on citywide financial results is available in the City’s Comprehensive Annual Financial Report as of June 30, 2008. The Water Utility’s financial statements comprise two components: 1) financial statements and 2) notes to the financial statements. Included as part of the financial statements are the balance sheets, statements of revenues, expenses, and changes in fund net assets, and statements of cash flows. The balance sheets present the assets and liabilities with the difference between the two reported as fund net assets. Over time, increases or decreases in fund net assets may serve as a useful indicator of whether the financial condition of the Water Utility is improving or deteriorating. The statements of revenues, expenses, and changes in fund net assets present information showing how the Water Utility’s fund net assets have changed during the most recent two fiscal years. Results of operations are recorded using the accrual basis of accounting, whereby transactions are reported as underlying events occur, regardless of the timing of cash flows. Thus, revenues and expenses are reported in these statements for some items that will result in cash flows in future fiscal periods, such as accounts receivable and accounts payable. The accrual basis of accounting is more fully described in the accompanying notes to financial statements. ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Management’s Discussion and Analysis June 30, 2008 and 2007 (In thousands) (Unaudited) 4 (Continued) The statements of cash flows present the flows of cash and cash equivalents during the last two fiscal years, including certain restricted amounts. The notes to financial statements provide additional information that is essential to the full understanding of the data provided in the financial statements to the financial statements. Financial Analysis As noted earlier, fund net assets may serve over time as a useful indicator of the Water Utility’s financial position. In the case of the Water Utility, assets exceed liabilities by $232,304 and $230,111 at June 30, 2008 and 2007, respectively. A large portion of the Water Utility’s fund net assets (92.9% and 87.9% as of June 30, 2008 and 2007, respectively) reflects its investment in capital assets, such as production, transmission, and distribution facilities, less any related debt used to acquire those assets that remain outstanding. The Water Utility uses these capital assets to provide services to customers. Consequently, these assets are not available for future spending. Resources needed to repay the outstanding debt on the balance sheets must come from other sources such as operations. An additional portion of the Water Utility’s fund net assets (1.6% and 1.6% as of June 30, 2008 and 2007, respectively) represents resources that are subject to external restrictions on how they may be used. These restrictions are for items such as debt repayment and other legally restricted purposes. The unrestricted portion of the Water Utility’s fund net assets (5.5% and 10.5% as of June 30, 2008 and 2007, respectively) may be used to meet the Water Utility’s ongoing obligations to creditors and customers. The Water Utility’s condensed statements of fund net assets at June 30 are as follows: Condensed Statements of Fund Net Assets 2008 2007 2006 Current and other assets $ 41,041 42,579 43,827 Net utility plant 233,674 222,556 220,490 Total assets 274,715 265,135 264,317 Long-term liabilities, net of current portion 17,951 20,225 22,414 Current liabilities 24,460 14,799 11,985 Total liabilities 42,411 35,024 34,399 Invested in capital assets, net of related debt 215,762 202,308 198,066 Restricted 3,809 3,651 3,581 Unrestricted 12,733 24,152 28,271 Total fund net assets $ 232,304 230,111 229,918 ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Management’s Discussion and Analysis June 30, 2008 and 2007 (In thousands) (Unaudited) 5 (Continued) As of June 30, 2008 Assets Total assets as of June 30, 2008 and 2007 were $274,715 and $265,135, respectively. The $9,580 increase in total assets is due to a $10,713 increase in noncurrent assets, which was offset by a $1,133 decrease in current assets. Noncurrent assets increased 4.7% primarily because of the $11,118 increase in net utility plant. The Water Utility is currently building additional storage facilities, wells and distribution facilities under a plan to ensure the water supply continues to be safe, reliable, and sufficient to meet future demands. Liabilities Total liabilities as of June 30, 2008 and 2007 were $42,411 and $35,024, respectively. The $7,387 (21.1%) increase in total liabilities is due to a $9,661 increase in current liabilities, which was offset by a $2,274 decrease in long-term liabilities. Current liabilities increased 65.3% primarily due to an increase in regulatory credits of $6,126 and an increase in accounts payable and accrued expenses of $3,803. Long-term liabilities decreased 11.2% primarily as a result of current year payments of principal on long-term debt. Fund Net Assets Total fund net assets as of June 30, 2008 and 2007 were $232,304 and $230,111, respectively. Total fund net assets increased by $2,193 during fiscal year 2008. Fund net assets invested in capital assets, net of related debt increased $13,454 due to continued expansion and refurbishment of water transmission and distribution infrastructure and a new supply source placed in service in fiscal year 2008. Unrestricted net assets decreased $11,419 because available cash and investments were used to fund ongoing capital construction projects. As of June 30, 2007 Assets Total assets as of June 30, 2007 and 2006 were $265,135 and $264,317, respectively. There were no significant or unusual changes. Liabilities Total liabilities as of June 30, 2007 and 2006 were $35,024 and $34,399, respectively. The $625 increase in total liabilities is due to a $2,814 increase in current liabilities, which was offset by a $2,189 decrease in long-term liabilities. Current liabilities increased 23.5% primarily due to an increase in accounts payable and accrued expenses of $2,526. Long-term liabilities decreased 9.8% primarily as a result of current year payments of principal on long-term debt. ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Management’s Discussion and Analysis June 30, 2008 and 2007 (In thousands) (Unaudited) 6 (Continued) Fund Net Assets Total fund net assets as of June 30, 2007 and 2006 were $230,111 and $229,918, respectively. Total fund net assets increased by $193 during fiscal year 2007. Fund net assets invested in capital assets, net of related debt increased $4,242 due to the continued expansion and refurbishment of the Water Utility’s capital asset infrastructure and supply sources. Unrestricted net assets decreased $4,119 This is due to a reduction in cash and investments resulting from ongoing capital assets construction. The Water Utility’s statements of revenues, expenses, and changes in fund net assets for the years ended June 30 are summarized as follows: Revenues, Expenses, and Changes in Fund Net Assets 2008 2007 2006 Revenues: Sale of water, net $ 47,938 48,062 45,608 Other operating revenues 1,187 1,538 1,318 Interest income 1,927 1,995 978 Capital contributions 3,005 1,980 3,261 Total revenues 54,057 53,575 51,165 Expenses: Purchased water 21,608 22,922 22,043 Treatment and pumping 6,650 5,605 4,625 Operations, maintenance, and administration 12,932 14,676 12,442 Depreciation 7,616 6,954 6,939 Interest expense 313 739 959 Total expenses 49,119 50,896 47,008 Transfers: Transfer to the General Fund of the City $ (2,008) (1,882) (1,756) Transfer of right-of-way fee to the City (721) (684) (635) Transfers from other funds of the City — 456 — Transfers to other funds of the City (16) (376) (137) Total transfers (2,745) (2,486) (2,528) Changes in fund net assets 2,193 193 1,629 Fund net assets at beginning of year 230,111 229,918 228,289 Fund net assets at end of year $ 232,304 230,111 229,918 ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Management’s Discussion and Analysis June 30, 2008 and 2007 (In thousands) (Unaudited) 7 (Continued) Revenues Year ended June 30, 2008 Total revenues for the fiscal year ended June 30, 2008 were $54,057 as compared with $53,575 in fiscal year 2007. There were no significant or unusual changes. Year ended June 30, 2007 Total revenues for the fiscal year ended June 30, 2007 were $53,575 as compared with $51,165 in fiscal year 2006. There were no significant or unusual changes. Revenues by Source Year ended June 30, 2008 Water Sales 89% Other Revenues 2% Interest Income 4% Capital Contributions 5% Year ended June 30, 2007 Water Sales 89% Other Revenues 3% Interest Income 4% Capital Contributions 4% ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Management’s Discussion and Analysis June 30, 2008 and 2007 (In thousands) (Unaudited) 8 (Continued) Expenses Year ended June 30, 2008 Total expenses for the fiscal year ended June 30, 2008 were $49,119 as compared with $50,896 in fiscal year 2007. This $1,777 decrease in total expenses is due to a $1,314 decrease in purchased water costs, partially offset by a $1,045 increase in treatment and pumping costs, and a $1,744 decrease in operations, maintenance, and administrative expenses (OM&A). The cost of purchased water decreased 5.7%. The amount of water the Water Utility pumped from the Orange Count Water District (OCWD) increased from 69.0% to 79.1% of the total water purchased for sale. Consequently, the amount of purchased water obtained from the Metropolitan Water District (MWD) of Southern California decreased from 31.0% to 20.9%. Because water purchased from (MWD) has a higher unit cost than the cost of water pumped from OCWD, this increase in the amount of water allowed to be pumped enabled the Water Utility to purchase less of the higher cost water from MWD. In addition, during fiscal year 2008, the Water Utility experienced approximately a 4.0% decrease in customer demand, resulting in a reduction in the total amount of water purchased. Treatment and pumping costs, however, increased 18.6% primarily as a result of the increased pump power (electricity) costs required for the greater OCWD well production volume. OM&A decreased 11.9% from fiscal year 2007. Operating costs decreased by $267 maintenance costs increased by $1,188 and administrative costs decreased $2,665 (18.2%) over the prior year. Maintenance costs have increased due to additional work being performed to ensure system reliability. Administrative costs decreased primarily because the allocation to the Water Utility of the common expenses shared with the Electric Utility was reduced by 10.0%, based on an updated analysis of the benefits provided by those shared expenses. Year ended June 30, 2007 Total expenses for the fiscal year ended June 30, 2007 were $50,896 as compared with $47,008 in fiscal year 2006. This $3,888 increase in total expenses is due to an $879 increase in purchased water costs, a $980 increase in treatment and pumping costs, and a $2,234 increase in OM&A. The cost of purchased water increased 4.0%. During fiscal year 2007, the Water Utility experienced a 4.0% increase in the commodity charge from the MWD and an 8.8% increase in the pump tax from OCWD, which resulted in increased purchased water costs. The record rainfall in fiscal year 2005 significantly enhanced the state of the groundwater basin, and therefore, OCWD increased the amount of water the Water Utility could pump from 64.0% to 69.0% of total water purchased for sale. Because water purchased from MWD has a higher unit cost than the cost of water pumped from OCWD, this increase in the amount of water allowed to be pumped enabled the Water Utility to purchase less of the higher cost water from MWD. Treatment and pumping costs increased 21.2% primarily as a result ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Management’s Discussion and Analysis June 30, 2008 and 2007 (In thousands) (Unaudited) 9 (Continued) of increased pump power (electricity) costs required for the increase in OCWD well production volume, as well as a modest increase in customer demand. OM&A increased 17.9% from fiscal year 2006. Operating costs increased by $260 maintenance costs increased by $683 and administrative costs increased $1,290 (30.7%) over the prior year. Maintenance costs have increased due to additional work being performed to ensure system reliability. The reduction of administrative overhead costs eligible for capitalization is the primary reason for the increase in administrative costs. Transfers Transfers to the City’s General Fund, as defined by City Charter, are equal to a maximum of 4% of total revenue of the prior fiscal year. Total revenue is defined as revenues from the sale of water plus other revenues. In addition, a right-of-way fee is transferred to the City’s General Fund equal to 1.5% of net revenues from the sale of water in the prior fiscal year. Net revenues are defined as revenues from sale of water less uncollectible accounts. In fiscal year 2007, the Water Utility purchased a parcel of land from the City to be used for a new well site. The Water Utility transferred $376 to the City’s Redevelopment Agency for this parcel. Expenses and Transfers Year ended June 30, 2008 Transfers 5% Interest Expense 1% Depreciation 14% OM&A 25% Treatment and Pumping 13% Purchased Water 42% ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Management’s Discussion and Analysis June 30, 2008 and 2007 (In thousands) (Unaudited) 10 (Continued) Expenses and Transfers Year ended June 30, 2007 Transfers 5% Interest Expense 1% Depreciation 13% OM&A 27% Treatment and Pumping 10% Purchased Water 44% Capital Assets and Debt Administration Capital Assets The Water Utility’s net investment in capital assets as of June 30, 2008 and 2007 was $233,674 and $222,556, respectively, net of accumulated depreciation. The Water Utility’s net investment in capital assets includes land, production wells and treatment plant, transmission, and distribution facilities, and general plant. The total net additions to investment in capital assets (before accumulated depreciation) for fiscal year 2008 were $13,228 The Water Utility’s investments in capital assets as of June 30 are as follows: 2008 2007 2006 Source of water supply $ 35,900 31,764 31,001 Pumping plant 40,482 39,118 39,145 Transmission and distribution 217,356 223,037 219,924 General plant 4,908 4,941 5,875 Land 2,130 2,113 1,846 Construction in progress 21,409 7,984 3,913 Total utility plant 322,185 308,957 301,704 Less accumulated depreciation (88,511) (86,401) (81,214) Net utility plant $ 233,674 222,556 220,490 ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Management’s Discussion and Analysis June 30, 2008 and 2007 (In thousands) (Unaudited) 11 (Continued) Additional information on the Water Utility’s capital assets can be found in note 3 to the financial statements. As of June 30, 2008 Fiscal year 2008 showed a net increase of $11,118 in the investment in capital assets (net utility plant) due mainly to ongoing projects to expand and refurbish the water transmission and distribution infrastructure and source of supply. In 1999, the Water Utility made the decision to increase its pumping capacity by building one new well per year for each of the subsequent 10 years. As of June 30, 2008, the Water Utility has completed approximately 70% of the planned new well pumping capacity. As of June 30, 2007 Fiscal year 2007 showed a net increase of $2,066 in the investment in capital assets (net utility plant) due mainly to expansion and refurbishment of the water transmission and distribution infrastructure and improvements in the communications and security systems of the water system. In 1999, the Water Utility made the decision to increase its pumping capacity by building one new well per year for each of the subsequent 10 years. As of June 30, 2007, the Water Utility has completed approximately 60% of the planned new well pumping capacity. Long-Term Debt As of June 30, 2008 and 2007, the Water Utility had total long-term debt outstanding of $20,870 and $23,248, respectively. The Water Utility’s outstanding long-term debt as of June 30 is as follows: 2008 2007 2006 Water revenue bonds $ 7,355 8,730 10,055 Notes payable and advances 13,515 14,456 15,402 Capital lease obligations — 62 66 Total long-term debt outstanding 20,870 23,248 25,523 Less: Current portion (2,370) (2,348) (2,292) Unamortized bond premium 122 165 214 Unamortized refunding costs (671) (840) (1,031) Total noncurrent long-term debt outstanding $ 17,951 20,225 22,414 ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Management’s Discussion and Analysis June 30, 2008 and 2007 (In thousands) (Unaudited) 12 The Water Utility maintains an AA+ credit rating from Standard & Poor’s. Additional information on the Water Utility’s long-term debt can be found in note 5 to the financial statements. As of June 30, 2008 Long-term debt decreased $2,378 primarily due to the repayment of principal on outstanding bonds and notes payable and advances. The revenues of the Water Utility have been pledged to pay the outstanding long-term debt. As of June 30, 2007 Long-term debt decreased $2,275 primarily due to the repayment of principal on outstanding bonds and notes payable and advances. The revenues of the Water Utility have been pledged to pay the outstanding long-term debt. Economic Factors and Rates For fiscal year 2009, the OCWD decreased the Basin Production Percentage (BPP) for all cities and water districts they serve (including Anaheim) from 74.0% to 69.0%. As a result, the Water Utility may need to purchase a larger quantity of MWD water that is priced higher than ground water pumped from OCWD. The decrease in the BPP was attributed to lower groundwater basin storage available. It should be noted that in fiscal year 2008, the BPP increased from 69.0% to 74.0%. In addition, OCWD raised the replenishment assessment charge, or the cost of pumping groundwater in 2009, from $237 per acre-foot to $249 per acre-foot. Requests for Information This financial report is designed to provide a general overview of the Water Utility’s finances. Questions concerning any information provided in this report or requests for additional financial information should be addressed to the Assistant General Manager – Finance and Administration, Anaheim Public Utilities, 201 South Anaheim Boulevard, Suite 1101, Anaheim, California 92805. ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Balance Sheets June 30, 2008 and 2007 (In thousands) Assets 2008 2007 Utility plant: Source of water su ly pp $ 35,900 31,764 Pumping plant 40,482 39,118 Transmission and distribution 217,356 223,037 General plant 4,908 4,941 Total depreciable utility plant 298,646 298,860 Less accumulated depreciation (88,511) (86,401) Net depreciable utility plant 210,135 212,459 Land 2,130 2,113 Construction in progress 21,409 7,984 Net utility plant 233,674 222,556 Restricted assets: Cash and cash equivalents 1,328 1,271 Investments 4,819 5,218 Total restricted assets 6,147 6,489 Other assets: MWDOC pipeline receivable 234 264 Unamortized debt issuance costs 109 142 Total other assets 343 406 Total noncurrent assets 240,164 229,451 Current assets: Cash and cash equivalents 8,976 9,245 Investments 18,625 19,410 Accounts receivable, net 6,338 6,120 Accrued interest receivable 296 347 Materials and supplies inventory 284 281 Purchased water in storage 32 281 Total current assets 34,551 35,684 Total assets $ 274,715 265,135 13 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Balance Sheets June 30, 2008 and 2007 (In thousands) Fund Net Assets and Liabilities 2008 2007 Fund net assets: Invested in capital assets, net of related debt $ 215,762 202,308 Restricted for: Debt service 1,472 1,425 Renewal and replacement 2,337 2,226 Unrestricted 12,733 24,152 Total fund net assets 232,304 230,111 Long-term liabilities: Long-term debt obligations, less current portion 17,951 20,225 Total long-term liabilities 17,951 20,225 Current liabilities (payable from restricted assets): Current portion of long-term debt 2,370 2,316 Arbitrage rebate liability 12 2 Accrued interest payable 259 285 Total current liabilities (payable from restricted assets) 2,641 2,603 Current liabilities (payable from unrestricted current assets): Current portion of capital leases — 32 Accounts payable and accrued expenses 13,043 9,240 Wages payable 245 337 Regulatory credits 6,954 828 Customer deposits 1,577 1,759 Total current liabilities (payable from unrestricted current assets) 21,819 12,196 Total liabilities 42,411 35,024 Total fund net assets and liabilities $ 274,715 265,135 See accompanying notes to financial statements. 14 ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Statements of Revenues, Expenses, and Changes in Fund Net Assets Years ended June 30, 2008 and 2007 (In thousands) 2008 2007 Operating revenues: Sales of water, net $ 47,938 48,062 Other operating revenues 1,187 1,538 Total operating revenues 49,125 49,600 Operating expenses: Purchased water 21,608 22,922 Treatment and pumping 6,650 5,605 Operations, maintenance, and administration 12,932 14,676 Depreciation 7,616 6,954 Total operating expenses 48,806 50,157 Operating income (loss) 319 (557) Nonoperating revenues (expenses): Interest income 1,927 1,995 Interest expense (313) (739) Total net nonoperating revenues 1,614 1,256 Income before capital contributions and transfers 1,933 699 Capital contributions 3,005 1,980 Transfer to the General Fund of the City (2,008) (1,882) Transfer of right-of-way fee to the City (721) (684) Transfers from other funds of the City — 456 Transfers to other funds of the City (16) (376) Change in fund net assets 2,193 193 Fund net assets at beginning of year 230,111 229,918 Fund net assets at end of year $ 232,304 230,111 See accompanying notes to financial statements. 15 ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Statements of Cash Flows Years ended June 30, 2008 and 2007 (In thousands) 2008 2007 Cash flows from operating activities: Receipts from customers and users $ 49,112 48,770 Receipts from services provided to other funds of the City 198 294 Payments to suppliers (22,740) (25,481) Payments to employees (10,812) (10,557) Payments for services provided by other funds of the City (3,681) (4,333) Net cash provided by operating activities 12,077 8,693 Cash flows from noncapital financing activities: Transfers to the General Fund and other funds of the City (2,729) (2,566) Net cash used in noncapital financing activities (2,729) (2,566) Cash flows from capital and related financing activities: Proceeds from sale of capital assets 5,642 — Capital contributions — 746 Capital purchases (15,346) (7,066) Principal payments on long-term debt and capital leases (2,316) (2,308) Interest paid (732) (816) Transfers to other funds of the City for capital purposes — (376) Net cash used in capital and related financing activities (12,752) (9,820) Cash flows from investing activities: Purchases of investment securities (77,502) (35,728) Proceeds from sale and maturity of investment securities 78,776 45,566 Collection of pipeline receivable 30 68 Interest income received 1,888 2,124 Net cash provided by investing activities 3,192 12,030 Increase (decrease) in cash and cash equivalents (212) 8,337 Cash and cash equivalents at beginning of year 10,516 2,179 Cash and cash equivalents at end of year $ 10,304 10,516 16 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Statements of Cash Flows Years ended June 30, 2008 and 2007 (In thousands) 2008 2007 Reconciliation of operating income (loss) to net cash provided by operating activities: Operating ( ) income loss $ 319 (557) Adjustments to reconcile operating income (loss) to net cash provided by operating activities: Depreciation 7,616 6,954 Changes in assets and liabilities: Accounts receivable, net (218) (529) Materials and supplies inventory (69) Purchased water in storage 249 111 Accounts payable and accrued expenses 3,803 2,526 Wages payable (92) 84 Customer deposits (182) 18 Regulatory credits 585 155 Total adjustments 11,758 9,250 Net cash provided by operating activities $ 12,077 8,693 Schedule of noncash investing, capital, and financing activities: Capital contributions $ 3,005 967 Transfers out of capital assets (16) (240) Capital assets financed through capital leases — 33 Increase (decrease) in fair value of investments 90 (128) See accompanying notes to financial statements. 17 ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 18 (Continued) Summary of Significant Accounting Policies Basis of Accounting The Water Utility Fund (Water Utility) of the City of Anaheim, California (City) was established on June 30, 1971, at which time the portion of the City’s General Fund net assets related to water system operations was transferred to Water Utility net assets. The financial statements of the Water Utility, an enterprise fund, are presented on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles and accounting principles and methods prescribed by the California Public Utilities Commission (CPUC). The Water Utility is not subject to the regulations of the CPUC. Under Governmental Accounting Standards Board Statement No. 20, Accounting and Financial Reporting for Proprietary Fund and Other Governmental Entities that Use Proprietary Fund Accounting, the Water Utility has elected not to apply Financial Accounting Standards Board (FASB) pronouncements issued after November 30, 1989. Utility Plant and Depreciation The cost of additions to utility plant and replacement of retired units is capitalized. Utility plant is recorded at cost, including capitalized interest, or in the case of contributed plant, at fair market value at the date of the contribution, except those assets acquired prior to July 1, 1977, which are recorded at historical cost. Cost includes labor, materials, allocated indirect charges such as engineering, supervision, construction and transportation equipment, retirement plan contributions and other fringe benefits, and certain administrative and general expenses. The cost of minor replacements is included in maintenance expense. The net book value of assets retired or disposed of, net of proceeds, is recorded in accumulated depreciation. Depreciation of utility plant is provided by the straight-line method based on the following estimated service lives of the properties: Source of water supply 15 to 75 years Pumping plant 10 to 75 years Transmission and distribution 20 to 75 years General plant 5 to 50 years Pooled Cash and Investments The City pools available cash from all funds for the purpose of enhancing investment income through investment activities. Investments in U.S. Treasury obligations, U.S. agency securities, and corporate notes are carried at fair value based on quoted market prices. Participating guaranteed investment contracts and flexible repurchase agreements are carried at fair value based on net realizable value. Money market mutual funds are carried at fair value based on the fund’s share price. The City’s investment in the ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 19 (Continued) State of California Local Agency Investment Fund (LAIF) is carried at fair value based on the value of each participating dollar as provided by LAIF. LAIF is authorized by California Government Code (Government Code) Section 16429 under the oversight of the Treasurer of the State of California. Commercial paper, nonparticipating guaranteed investment contracts, and negotiable certificates of deposit are carried at amortized cost (which approximates fair value). Investment income, which includes changes in fair value, is allocated to all funds on the basis of average daily cash and investment balances. The Water Utility’s cash and investments pooled with the City Treasurer (Treasurer) are carried at fair value based on the value of each participating dollar. See note 2 for further discussion. For the purpose of the statements of cash flows, the Water Utility considers cash equivalents to be highly liquid short-term investments that are readily convertible to known amounts of cash and mature within three months from the date they are acquired. Cash and cash equivalents are included in the City’s cash and investments pool and in accounts held by fiscal agents. Revenue Recognition Revenue is recorded in the period earned. The Water Utility accrues estimated unbilled revenues for water sold but not billed at the end of a fiscal period, which amounted to approximately $3,641 and $3,428 for fiscal years 2008 and 2007, respectively. Residential and smaller commercial accounts are billed and all other customers are billed The City Council must be notified for all changes in base water rates. Rates have been structured to recover the Water Utility’s costs for providing water services. The Water Utility’s Rates, Rules, and Regulations include a Water Commodity Adjustment formula by which billings to customers are subject to adjustment, up or down, to reflect variations in the cost of water production and water quality measures to the Water Utility. Revenues are reported net of uncollectible amounts. Total uncollectible amounts written off are $63 and $19 for the fiscal years ended June 30, 2008 and 2007, respectively. The applicable allowances for uncollectible amounts are $68 and $3 at June 30, 2008 and 2007, respectively. See note 5 for discussion of pledged revenue. Operating Expenses Purchased water includes all purchases of water from the Metropolitan Water District (MWD) of Southern California and ground water basin pumping charges from the Orange County Water District (OCWD). Treatment and pumping charges include all costs associated with the Water Utility’s Lenain Filtration Plant and all costs associated with pumping the water throughout the Water ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 20 (Continued) Utility’s water distribution system. This includes the energy costs associated with the pumps. Operation, maintenance, and administration expenses (OM&A) include all costs associated with the distribution of water, administration, operating and maintaining the water facilities, and customer service. Debt Issuance Costs Debt issuance costs are deferred and amortized over the lives of the related bond issues on a basis that approximates the effective-interest method. Bond Refunding Costs Bond refunding costs are deferred and amortized over the life of the new bond or over the life of the old bond, whichever is shorter, on a basis that approximates the effective-interest method. These costs are shown as a reduction of the long-term debt obligation on the accompanying financial statements. Vacation and Sick Pay Vacation and sick pay for all City employees are paid by the General Benefits and Insurance Fund of the City. The General Benefits and Insurance Fund is reimbursed through payroll charges to the Water Utility based on estimates of benefits to be earned during the year. Vested vacation and sick pay benefits are accrued in the General Benefits and Insurance Fund and amounted to $630 and $601 for the Water Utility at June 30, 2008 and 2007, respectively. Transfers (to) from Other Funds of the City Article XII of the City Charter provides that transfers to the General Fund of the City shall not exceed 4% of total revenue, as defined by the City Charter, of the prior year. Such transfers are not in lieu of taxes and amounted to $2,008 and $1,882 for the fiscal years ended June 30, 2008 and 2007, respectively. The transfer of right-of-way fee to the City represents the City Council approved transfer of 1.5% of net water revenues of the prior fiscal year to the General Fund of the City. Net revenues are revenues from the sale of water, less uncollectible amounts. Bond disclosure requirements designate that this transfer must be recognized as an expense in the calculation of bond coverage. The transfer of right-of-way fee to the City amounted to $721 and $684 for the fiscal years ended June 30, 2008 and 2007, respectively. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 21 (Continued) the reported amounts of certain assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. As such, actual results could differ from those estimates. Reclassifications Certain 2007 amounts have been reclassified to conform to the 2008 presentation. Such reclassifications had no effect on the previously reported change in net assets. Deposits and Investments The City maintains a cash and investment pool, which includes the cash balance of all City funds, including the Water Utility funds, and is invested by the Treasurer to enhance interest earnings. The pooled interest earned, net of administrative fees, is reallocated to each fund based on average daily cash balances. The City’s investment policy further limits the permitted investments in Government Code Sections 53600, 16429.1, and 53684, et seq. to the following: obligations of the U.S. government, federal agencies, and government-sponsored enterprises; medium-term corporate notes; certificates of deposit; bankers’ acceptances; commercial paper rated A-1 by Standard & Poor’s Corporation P-1 by Moody’s Investors Service (Moody’s), or F-1 by Fitch Ratings (Fitch); LAIF; repurchase agreements; reverse repurchase agreements; and money market mutual funds. The Water Utility maintains cash equivalents and investments at June 30, 2008 and 2007 with the following carrying amounts: 2008 2007 Cash equivalents and investments pooled with the Treasurer $ 31,682 32,593 Investments held with trustee 2,066 2,551 $ 33,748 35,144 At June 30, the Water Utility’s cash equivalents and investments are recorded as follows: 2008 2007 Restricted assets – cash equivalents and investments $ 6,147 6,489 Current assets – cash equivalents and investments 27,601 28,655 $ 33,748 35,144 ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 22 (Continued) Investments The Treasurer prepares an investment policy statement annually, which is presented to the Investment Advisory Commission for review and the City Council for approval. The approved investment policy statement is submitted to the California Debt and Investment Advisory Committee in accordance with Government Code. The policy provides the basis for the management of a prudent, conservative investment program. Public funds are invested for the maximum security of principal, to meet daily cash flow needs, while providing a return. All investments are made in accordance with the Government Code, and in general, the Treasurer’s policy is more restrictive than Government Code. The City did not have any violations of its policy during the current fiscal year. Section 53607 of the Government Code allows the City Council to delegate its investment authority to the Treasurer and requires that the Treasurer provide a report to City Council of investment transactions. The annual delegation of authority is incorporated in the investment policy. The Treasurer’s report meets the requirements for investment reporting. Investments Authorized by the Government Code and the City’s Investment Policy The table below identifies the investment types that are authorized for the City by its investment policy, which is more restrictive than Government Code. The table also identifies certain provisions of the City’s investment policy that address interest rate risk, credit risk, and concentration of credit risk. This table does not address investments of debt proceeds held by bond trustees that are governed by the provisions of debt agreements of the City, rather than the general provisions of the Government Code or the City’s investment policy. Maximum Maximum Maximum percentage investment Authorized investment type maturity of portfolio* in one issuer U.S. Treasury obligations 5 years None None U.S. agency securities 5 years 75% 20% Bankers’ acceptances 180 days 25 5 Commercial paper 270 days 25 5 Negotiable certificates of deposit 3 years 15 5 Repurchase agreements 90 days 75 None Reverse repurchase agreements 92 days 20 None Medium-term corporate notes 5 years 15 5% Money market mutual funds N/A 20 10 LAIF N/A $80 million None Time certificates of deposit (TCD) 5 years 30% 5% * Excluding amounts held by bond trustees that are not subject to Government Code restrictions. ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 23 (Continued) At June 30, 2008, the City exceeded 5% concentration in the following U.S. agency securities: Federal Farm Credit Bank $50,027 Federal Home Loan Bank $61,647 Federal Home Loan Mortgage Corporation $43,621 and Federal National Mortgage Association $67,245 At June 30, 2007, the City exceeded 5% concentration in the following U.S. agency securities: Federal Farm Credit Bank $47,143 Federal Home Loan Bank $74,162 Federal Home Loan Mortgage Corporation $33,341 and Federal National Mortgage Association $41,516 Investments Authorized by Debt Agreements Investment of debt proceeds held by bond trustees is governed by provisions of the debt agreements, rather than the general provisions of the Government Code or the City’s investment policy. The table below identifies the investment types that are authorized for investments held by bond trustees. The table also identifies certain provisions of these debt agreements that address interest rate risk, credit risk, and concentration of credit risk. Maximum Maximum Maximum percentage investment Authorized investment type maturity of portfolio in one issuer U.S. Treasury obligations None None None U.S. agency securities None None None Guaranteed investment contracts None None None Collateralized investment contracts None None None Flexible repurchase agreements None None None Money market mutual funds None None None LAIF None None None At June 30, 2008, the City’s investments controlled by fiscal agents exceeded 5% concentration in the following U.S. agency securities, guaranteed investment, and collateralized investment contracts: Federal Home Loan Bank $33,736 Federal Home Loan Mortgage Corporation $43,406 Federal Farm Credit Bank $23,177 Bank of America $16,645 Morgan Stanley $23,775 and Dreyfus Institutional Reserve Treasury Fund $14,270 All guaranteed investment contracts have downgrade language that requires collateral should credit ratings drop below certain levels. At June 30, 2007, the City’s investments controlled by fiscal agents exceeded 5% concentration in the following U.S. agency securities, guaranteed investment, and collateralized investment contracts: Federal Home Loan Bank $58,312 Federal Home Loan Mortgage Corporation $26,928 XL Asset Funding Corporation $47,412 ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 24 (Continued) and Rabobank Nederland $62,244 All guaranteed investment contracts have downgrade language that requires collateral should credit ratings drop below certain levels. Custodial Credit Risk Custodial credit risk for investments is the risk that the City will not be able to recover the value of investment securities that are in the possession of an outside party. All securities owned by the City with the exception of LAIF and money market mutual funds are deposited in trust for safekeeping with a custodial bank different from the City’s primary bank. Securities are not held in broker accounts. Funds held by LAIF and money market mutual funds are held in the City’s name. Custodial credit risk for investments held by the bond trustee is the risk that the City will not be able to recover the value of investment securities that are in the possession of an outside party. All securities held by the bond trustee are in the name of the bond issue in trust for safekeeping with the bond trustee, which is different from the City’s primary bank. Interest Rate Risk Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The Treasurer mitigates this risk by investing in longer term securities only with funds that are not needed for current cash flow purposes and holding these securities to maturity. The Treasurer uses the segmented time distribution method to identify and manage interest rate risk. In accordance with the City’s investment policy, the Treasurer monitors the segmented time distribution of its investment portfolio and analysis of cash flow demand. Interest rate risk for investments held by bond trustees is offset by the fact that the long-term investments are for the reserve funds with the semiannual interest payments used to pay a portion of the debt service. These are long-term securities, which are not adversely affected by interest rate changes. Investment contracts for construction funds are usually limited to three years or less. Money market mutual funds are used to accumulate or semiannual debt service payments. Information about the sensitivity of the fair values of the Water Utility’s investments (including investments held by bond trustees) to market interest rate fluctuations is provided by the following table. ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 25 (Continued) The distribution of the Water Utility’s cash and investments by maturity at June 30, 2008 and 2007 is as follows: Credit Fair value 12 months 13 to 24 25 to 36 37 to 60 More than Investments rating June 30, 2008 or less months months months 60 months Treasurer’s pooled investments: U.S. Treasury obligations Exempt $ 4,285 4,285 — — — — U.S. agency securities AAA 15,325 3,226 494 5,072 6,533 — Medium-term notes Aa2-AA- 1,398 351 710 — 337 — Commercial paper P1-A1+ 3,437 3,437 — — — — Money market mutual funds AAA 2,140 2,140 — — — — LAIF Unrated 5,097 5,097 — — — — Total Treasurer’s pooled investments 31,682 18,536 1,204 5,072 6,870 — Investments controlled by fiscal agents: Guaranteed investment agreement Unrated 1,211 — — — — 1,211 Money market mutual funds AAA 855 855 — — — — Total investments controlled by fiscal agents 2,066 855 — — — 1,211 Total investments $ 33,748 19,391 1,204 5,072 6,870 1,211 Credit Fair value 12 months 13 to 24 25 to 36 37 to 60 More than Investments rating June 30, 2007 or less months months months 60 months Treasurer’s pooled investments: U.S. Treasury obligations Exempt $ 9,261 5,794 3,467 — — — U.S. agency securities AAA 11,486 3,295 2,909 400 4,882 — Medium-term notes Aa2-AA- 1,272 402 286 584 — — Commercial paper P1-A1+ 6,009 6,009 — — — — Money market mutual funds AAA 1,932 1,932 — — — — LAIF Unrated 2,633 2,633 — — — — Total Treasurer’s pooled investments 32,593 20,065 6,662 984 4,882 — Investments controlled by fiscal agents: Guaranteed investment agreement Unrated 1,841 — — — — 1,841 Money market mutual funds AAA 710 710 — — — — Total investments controlled by fiscal agents 2,551 710 — — — 1,841 Total investments $ 35,144 20,775 6,662 984 4,882 1,841 ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 26 (Continued) Utility Plant The following is a summary of changes in capital assets: Balance as Balance as Balance as of June 30, of June 30, of June 30, 2006 Additions Deletions 2007 Additions Deletions 2008 Source of water supply $ 31,001 1,108 (345) 31,764 4,136 — 35,900 Pumping plant 39,145 44 (71) 39,118 1,526 (162) 40,482 Transmission and distribution 219,924 3,817 (704) 223,037 2,935 (8,616) 217,356 General plant 5,875 32 (966) 4,941 223 (256) 4,908 Depreciable utility plant 295,945 5,001 (2,086) 298,860 8,820 (9,034) 298,646 Less accumulated depreciation (81,214) (6,954) 1,767 (86,401) (7,616) 5,506 (88,511) Net depreciable utility plant 214,731 (1,953) (319) 212,459 1,204 (3,528) 210,135 Land 1,846 267 — 2,113 304 (287) 2,130 Construction in progress 3,913 8,793 (4,722) 7,984 16,076 (2,651) 21,409 Nondepreciable utility plant 5,759 9,060 (4,722) 10,097 16,380 (2,938) 23,539 Net utility plant $ 220,490 7,107 (5,041) 222,556 17,584 (6,466) 233,674 Operating Expenses Total operating expenses shared with the City’s Electric Utility amounted to $26,164 and $23,727 for the fiscal years ended June 30, 2008 and 2007, respectively, of which $5,233 and $7,118, respectively, of shared operating expenses were allocated to the Water Utility. The shared expenses allocated to each utility are based on estimates of the benefits each utility derives from those common expenses. ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 27 (Continued) Long-Term Liabilities The following is a summary of changes in long-term liabilities: Beginning Due within June 30, 2008 of year Additions Retirements End of year one year Water revenue bonds $ 8,730 — (1,375) 7,355 1,435 Notes payable and advances 14,456 — (941) 13,515 935 Capital lease obligations 62 — (62) — — 23,248 $ — (2,378) 20,870 2,370 Less current portion (2,348) (2,370) Add unamortized bond premium 165 122 Less unamortized refunding costs (840) (671) Total long-term liabilities $ 20,225 17,951 Beginning Due within June 30, 2007 of year Additions Retirements End of year one year Water revenue bonds $ 10,055 — (1,325) 8,730 1,375 Notes payable and advances 15,402 — (946) 14,456 941 Capital lease obligations 66 33 (37) 62 32 25,523 $ 33 (2,308) 23,248 2,348 Less current portion (2,292) (2,348) Add unamortized bond premium 214 165 Less unamortized refunding costs (1,031) (840) Total long-term liabilities $ 22,414 20,225 ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 28 (Continued) Long-term debt consists of the following at June 30: 2008 2007 Water Revenue Bonds, 2004 Series, TIC 3.5629%, dated May 1, 2004, sold on May 26, 2004 in the amount of $12,105, maturing serially through October 1, 2016. The annual principal installments range from $5 to $1,490 at rates ranging from 4.0% to 4.5%. Total remaining debt service is $8,324 to maturity. $ 7,355 8,730 Total Water Revenue Bonds $ 7,355 8,730 Note payable to State of California Revolving Fund, 2.8%, issued June 12, 2001, in the amount of $18,063, semiannual principal and interest payments of $592 through July 31, 2021; total remaining debt service is $15,997 to maturity. $ 13,250 14,048 Advances from the OCWD, 3.5%, a partial installment under terms of a $750 per Well Construction Program Agreement, dated April 18, 1990, for the construction of Wells 46, 47, and 49, semiannual principal and interest installment payments of $94 through July 31, 2010; total remaining debt service is $278 to maturity. 265 408 Total notes payable and advances $ 13,515 14,456 Annual debt service requirements for the Water Utility’s revenue bonds, notes payable, and advances at June 30, 2008 to maturity are as follows: Principal Interest Total Fiscal years ending June 30: 2009 $ 2,370 642 3,012 2010 2,452 556 3,008 2011 1,779 482 2,261 2012 1,807 420 2,227 2013 1,867 358 2,225 2014 – 2018 6,670 1,049 7,719 2019 – 2023 3,925 222 4,147 $ 20,870 3,729 24,599 ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 29 (Continued) Interest costs of $562 and $231 have been capitalized for the fiscal years ended June 30, 2008 and 2007, respectively. In accordance with the bond resolutions, a reserve for maximum annual debt service has been established and a reserve for renewal and replacement is being accumulated in an amount equal to a maximum of 1% of the depreciated book value of the utility plant in service. The bond resolutions require the establishment of a bond service account accumulating one-sixth of the interest, which will become due and payable on the outstanding bonds within the next six months, and by one-twelfth of the principal amount, which will mature and be payable on the outstanding bonds within the next 12 months. Those amounts have been recorded in net assets restricted for debt service on the accompanying balance sheets. There are various limitations and restrictions contained in the Water Utility’s bonds and notes. The Water Utility’s management believes it is in compliance with all limitations and restrictions. The Water Utility has pledged future revenues to repay a total of $8,324 and $10,024 of outstanding long-term obligations, principal and interest for the years ended June 30, 2008 and 2007, respectively. Proceeds from bonds provide financing for various capital improvements, primarily distribution assets. The Water Utility’s bonds are payable solely from water net revenues and are payable through fiscal year 2018. As of June 30, 2008 and 2007, the annual principal and interest payments on the bonds are 17.2% and 20.3% of net revenues, respectively. Debt service paid and total net revenues were $1,700 and $9,862 and $1,704 and $8,392 for the years ended June 30, 2008 and 2007, respectively. Restricted cash and investments include reserve amounts at June 30 as follows: 2008 2007 Held by fiscal agent: Bond reserve fund $ 2,066 2,551 Held by Treasurer: Bond service account 1,744 1,712 Renewal and replacement account 2,337 2,226 $ 6,147 6,489 The Water Utility’s interest and other finance charges, excluding capitalized interest, for the fiscal years ended June 30, 2008 and 2007 were $313 and $739, respectively. Pension Plan The City contributes to the State of California Public Employees’ Retirement System (PERS), an agent multiple-employer public employee retirement system that acts as a common investment and administrative agent for California cities that participate in this retirement plan. ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 30 (Continued) For both fiscal years ended June 30, 2008 and 2007, as a condition of participation, employees are required to contribute 8% of their annual covered salary to PERS. The City pays 7% of the employees’ required contributions and the employees pay the remaining The City is required to contribute the remaining amounts necessary to fund PERS, using the actuarial basis recommended by the PERS actuaries and actuarial consultants and adopted by the PERS Board of Administration. The Water Utility is allocated their portion of the City’s required contribution, as determined by PERS actuaries. This allocation is based on eligible employee wages. The Water Utility contributed $911, $1,371, and $1,175 to PERS for the fiscal years ended June 30, 2008, 2007, and 2006, respectively, which represented 100% of its required contributions. Information is not available separately for the Water Utility as to the cost of benefits funded, the actuarially computed present value of vested and nonvested accumulated plan benefits, the related assumed rates of return used, and the actuarially computed value of vested benefits over the related pension fund assets. Refer to the City’s Comprehensive Annual Financial Report as of June 30, 2008 for further information. Self-Insurance Program The Water Utility participates in the City’s self-insured workers’ compensation and general liability program. The liability for such claims, including claims incurred but not reported, is transferred to the City in consideration of self-insurance premiums paid by the Water Utility. Premiums for workers’ compensation and general liability programs are charged to the Water Utility by the City based on various allocation methods that include actual cost, claims experience, exposure base, and number of participants. Premiums charged and paid were $125 and $179 for the fiscal years ended June 30, 2008 and 2007, respectively. At June 30, 2008, the City was fully funded for self-insured workers’ compensation and general liability claims (self-insured retention levels of $1,000 per occurrence for workers’ compensation claims and $1,000 per occurrence for general liability claims). Above these self-insured retention levels, the City’s potential liability is covered through various commercial insurance and intergovernmental risk pooling programs. Settled claims have not exceeded insurance coverage in any of the past three years, nor does management believe that there are any claims pending that will exceed insurance coverage. Regulatory Credits The Water Utility’s Rates, Rules, and Regulations provide for a water regulatory credits account to reflect variations in the cost of water to the Water Utility and provide more stable retail water rates to the customers of the City’s Water Utility. This stabilization account provides increased flexibility by allowing the Water Utility to maintain financial performance indicators and goals specified in bond covenants. The account is funded through expense reimbursements such as water supply cost refunds received from the MWD and OCWD and other miscellaneous credits and revenue. In fiscal year 2008, funding for this account consisted primarily of proceeds of ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 31 (Continued) $5,642 from the sale of land previously held for use as a future well site. In fiscal year 2007, the Water Utility funded this account through a variety of miscellaneous credits. As permitted by FASB Statement No. 71, Accounting for the Effects of Certain Types of Regulation, and approved by the City Council, revenues from amounts collected are deferred and recorded as regulatory credits in the balance sheets. At June 30, 2008 and 2007, the liability recorded for regulatory credits totaled $6,954 and $828, respectively. Commitment and Contingencies Litigation A number of claims and suits are pending against the City for alleged damages to persons and property and for other alleged liabilities arising out of matters usually incidental to the operation of a utility such as the water system of the City. In the opinion of management, the exposure under these claims and suits would not materially affect the financial position of the Water Utility as of June 30, 2008 and 2007. Construction Commitments At June 30, 2008, the Water Utility had the following commitments with respect to unfinished capital projects: Estimated Construction completion Capital project commitment date Well 48 at Dad Miller Golf Course $ 15 2009 Pressure Regulating Station 69 536 2009 Walnut Canyon Reservoir 4,785 2009 Nohl Canyon Tank 15,834 2011 Santa Ana Canyon Road 30” Transmission Main 2,197 2009 Maple Tree Water Main Replacement 323 2009 Meadowridge Main Replacement 719 2009 Anaheim Hills Road 30” Transmission Main 418 2009 A-4 Vault 7 2009 $ 24,834 At June 30, 2007, the Water Utility had construction commitments totaling $4,628. ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 32 (10) Subsequent Events On July 9, 2008, the Water Utility received the proceeds from the sale of the Anaheim Public Financing Authority (Authority) Revenue Bonds, 2008 Series, TIC 4.86%, dated July 1, 2008 in the amount of $48,580, maturing serially through October 1, 2038. The annual principal installments, which begin October 1, 2013, range from $260 to $3,750 at rates ranging from 4.0% to 5.0%. The bonds were issued by the Authority for the purpose of providing financing for the acquisition and construction of new storage facilities, wells, pumping facilities, and various other capital projects of the Water Utility. The revenues of the Water Utility have been pledged to pay this long-term obligation.